Insurance for Law Firms - Real Life Claims Examples

From time to time we are contacted by a potential client who questions whether he/she or the firm really needs professional liability insurance. Well, we certainly believe that the answer is "yes" but since we've "got a dog in this fight" as the saying goes, we thought that a few claims scenarios might be helpful:
THE CASE OF THE PROCRASTINATING EX-PARTNERS: A successful two-attorney firm – sounds innocent enough, doesn’t it? Well, as happens from time to time, the partners decided to go their separate ways. One of them joined an existing firm of about a half-dozen lawyers, and the other partner opened a solo practice. There was about 6 months to go on the now-dissolved firm’s malpractice policy, and the decision was made to simply let it run until expiration, at which point the solo partner would take the policy over for himself. Neither the carrier that insured the two-attorney firm, nor the carrier insuring the six-attorney firm was notified of any of these changes.
Well, as it turned out, a claim arose against the now-solo partner during this period (don't you just HATE when that happens?). While the facts surrounding the claim turned out to have nothing whatsoever to do with the attorney who was now a member of the six-attorney firm, the claim was made against the policy belonging to his old firm, and thus claims experience liability was imputed against him. When it came time to renew the larger firm’s insurance policy, and their carrier now became aware of the new partner, the underwriter quite naturally wanted to see a claims history report from his prior carrier. Yes, you guessed it, it now showed an open claim with a fairly significant reserve, for both defense and indemnity. The larger firm’s insurance carrier balked – and offered to renew the firm's policy with a substantial increase in premium.
It was at this point that we were first contacted, and asked to see if there was any way to sort this whole thing out. The firm’s existing broker at the time represented the insurance carrier on an exclusive basis, and thus they had nowhere else to turn, and were telling the firm that they simply had to accept the large increase in order to renew coverage.
We were successful in assembling all of the facts, and then presenting the file to several other insurers. While a few underwriters wanted nothing to do with the risk, we did convince a couple of underwriters to look beyond the poor choices that were made and to realize that the actual risk profile of the larger firm was, in fact, quite favorable. The final result was that an excellent carrier agreed to write the coverage with only a modest surcharge, with the promise to revisit the issue upon renewal – at which point the surcharge was removed.
THE CASE OF AN OVERABUNDANCE OF CAUTION: Indeed, sometimes you can be TOO careful. We recently were contacted by a successful PI Plaintiff firm, which, rather than handling a few high value cases, aggressively advertised and accepted a high volume of relatively low value cases. As sometimes happens with lots of advertising, many potential clients showed up with questionable cases, or having already had prior counsel withdraw. Some of these cases were perilously close to being barred by the statute of limitations.
Well, the firm's philosophy was to accept the majority of these cases, and undertake an investigation. Unfortunately - and invevitably - cases were accepted just as the statute ran, or sometimes with clear indications that the client had completely unrealistic expectations about what they felt their claim was worth.
Despite the best efforts of the attorneys, a number of clients expressed their dissatisfaction with the outcome. Believing it to be in their best interests, the firm reported each and every indication of client dissatisfaction to their insurance carrier as a potential claim.
Amazingly, this did not seem to bother the carrier for a while, and since their broker never inquired about whether there was a problem, the reporting continued. Finally, after assembling a collection of nearly two dozen "incidents" (all with "0/0" reserves, meaning even the carrier thought the matters were inconsiquential) a real claim came along. Not a major one, mind you, but it caused the carrier to set up a $25,000 indemnity reserve. This also triggered a claims review of the account, and - you guessed it - the policy was non-renewed due to "claims frequency."
We were contacted at this point. While we succeeded in placing their coverage with a highly reputable non-standard carrier, they had to purchase a "tail" from their old carrier. All of this was quite expensive.
We have assisted our client by reviewing not only how and when they report claims, but also by having them do a serious review of their client intake procedures. Now, cases that look like trouble are simply turned away. Not only does this help avoid future trouble, but it also leaves more time to focus on the firm's caseload, hopefully leading to better results for all concerned.
THE CASE OF THE HONEST - BUT EXPENSIVE - MISTAKE: Our client at the time, a midsize law firm with corporate practice focusing on closely held, family-owned businesses, was asked by one of their long-time clients to handle the purchase of an existing financial services business. There was nothing particularly unusual about this matter, and it was something that the firm was well qualified to handle.
The negotiations were drawn out, and sometimes rancorous. Many drafts of the purchase agreement went back and forth between attorneys, and many principals on both sides. The deal even "died" a couple of times, only to come back to life a few weeks later.
As is often the case in situations such as these, the paperwork, emails, faxes, etc. grew and grew. Unfortunately, at some point during the negotiations a subtle - but ultimately key - change was made in the wording of one of the employment contracts. No one is quite sure who made the change, or when it was done.
The deal eventually closed, and everyone was happy. That is, until about six months later when the seller suddenly sought to invoke the mysteriously changed clause in his employment contract, claiming that he was entitled to an additional payment of nearly $1 Million.
Needless to say, everyone was no longer happy. To make a long story short, our client appears to have somehow missed this change - or at least its arguable significance. Certainly, the firm's client knows that this was an honest mistake, but the bottom line is the bottom line - and it looks like the whole thing is headed for trial, unless some sort of settlement can be worked out. Naturally, our client is potentially liable for much of this.
Again, this was a matter that the law firm was totally qualified to handle. It was not an example of an attorney or attorneys over-their-head. It was a mistake. An honest mistake. These things DO happen.
Fortunately, their malpractice carrier responded by assigning the defense to a highly respected firm, with a long track record of successfully dealing with legal malpractice claims. In fact, it is due in part to the defense lawyers' reputation that settlement talks appear to be making progress.
What will happen with to their insurance coverage? Well, time will tell, but so far they have been renewed, albeit with a modest surcharge and higher deductible. The carrier understands that as significant as this claim might be, it is in all likelihood a "once-in-a-career" matter, and does not truly reflect the risk profile of the firm.

The Bottom Line?